The CBO Whiffs on the Minimum Wage -Daily KOS

[Bill USA]

[font size="3"] "...as Baker emphasizes, "...we are not going to see 500,000 designated losers who are permanently unemployed as a result of this policy." Instead, what will happen is people will work 2% fewer hours at an hourly rate that is 39.3% higher." "[/font]



http://www.dailykos.com/story/2014/02/19/1278712/-The-CBO-Whiffs-on-the-Minimum-Wage
(emphasis my own)

The Congressional Budget Office has just issued a report on the minimum wage that is a real head-scratcher. Analyzing proposals to raise the minimum wage to $9.00 or $10.10 per hour, it concludes in the latter case that there would be 500,000 fewer jobs in the second half of 2016 than there would be under current law (100,000 fewer for $9.00/hr.).

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There are two problems with these claims. First, the CBO's calculations undervalue the best research on the minimum wage. Second, even in the CBO's estimated world, low wage workers are much better off as a whole than under the current $7.25/hr. minimum wage.

As I've discussed before, a relatively crude cross-national comparison of rich countries' minimum wages and unemployment rates does nothing to suggest any job-killing is going on. But the CBO's estimation procedure has serious flaws. It begins (p. 6) with what it calls "conventional economic analysis," which is already a big mistake. Simple Econ 101 reasoning (when the price of something goes up, the quantity purchased goes down) has had only sketchy empirical support, something that has been especially clear from meta-analysis of minimum wage studies (ungated version of Doucouliagos and Stanley 2009 here).

[font size="3"]The CBO, of course, has heard of these studies, but it remains with a non-transparent explanation of how it weighted different studies (p. 22), saying it gave the most weight to contiguous state comparison studies. The only thing is, according to Arindajit Dube, these are the studies least likely to find a negative employment effect. Thus, how CBO ends up with a baseline of job loss remains mystifying.[/font]
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[1StrongBlackMan]

1. This is why numeric illiteracy is so dangerous ...

and a numeric literate media (if only among the pundit class) is vital.

[BlueStreak]

2. A lot of people wouldn't need to work 3 jobs if they made a living wage.

[Bill USA]

4. good point! and then they would live longer, too (especially now that they can get Health insurance.

[BlueStreak]

5. Oh crap. Next the CBO will say that increase min wage will kill Social Security

After all, if people can make a living wage without working 80- hours a week, they will live longer, which will bankrupt the ACA and Social Security. The republicans have it right. The numbers work out a lot better if the 99% would just die without making such a ruckus.

[btrflykng9]

7. +1

[Doctor_J]

3. The CBO model seems to presume that a McDonald's is typically over-staffed

IOW if they have ti lay off due to the enormous $10.10 minimum wage, yet stay open, that mean that before the bump they had more people than they needed. This is preposterous at first glance.

[BlueStreak]

6. Well, there is something to that.

I agree with your point. The reality is that places like MacDonald's probably don't have extra people around just because they are cheap. But there are some occupations where a change at the margins could change ow staffing is done. Some car rental companies employ seniors to drive vehicles around to balance their fleet. It seems inefficient, but those are minimum wage workers who otherwise would be sitting at home in most cases.

If the minimum wage were $15.00 instead of $7.45 it might make more economic sense to invest in mini-transports where one driver could move 5 vehicles at a time.

But that one worker could not do the work of 5 people just because one guy with a transport is not very flexible. He might displace 2 of the other workers. Plus some new jobs would be created building the transports.

It is really hard to see how the CBO could justify their numbers with a more modest increase in the minimum wage. Let's look at that same example if minimum wage goes to $10. In that case, the car rental company may decide it is more efficient to keep a few more cars in the fleet and do less moving of vehicles. So they reduce from 5 drivers to 4. BUT ... they now have more cars in fleet. That means extra workers will be needed at the car manufacturer and all through the delivery pipeline. And all those salaries have a multiplier when their paycheck gets into the economy.

It is not hard to imagine a scenario where all this analysis and shifting that might be triggered by a change in minimum wage actually results in MORE TOTAL ECONOMIC ACTIVITY throughout the broad economy -- a virtuous cycle.

[Bill USA]

8. the CBO in fact calculated a net INCREASE in demand with a Decrease in Employment. ...'interesting'

CBO report says: There would be a net INCREASE in DEMAND even if there would be job losses..

...of course, if they did not calculate the change in demand properly from a 4.8% increase in prices (see below) and a 38% increase in buying power for some percentage of the 59% of the country's employed (1.6 million, of 75.3 million hourly employees, are paid the minimum wage, but CBO correctly indicated that increasing the wages of those at the minimum wage would lead to increases in others just above minimum wage to maintain the relative pay scale), the number of jobs lost could be zero or it may be a number of jobs GAINED depending on how buyers reacted to a given price increase (not specified by CBO) and given the 38% increase in buying power for some proportion of all hourly wage workers).

[BlueStreak]

9. And that extra demand will create NEW EMPLOYMENT

It seems to me the CBO didn't close the loop on that. I realize that economists can have a legitimate disagreement when some hypotheticals are involved, but this is not exactly advanced exotic economic theory. When people at the bottom of the economic ladder have more money in their pocket, they will spend practically all of it. And that generates additional economic activity.

They would have been more accurate to talk about some DISPLACEMENT of jobs.